The Guardian 30 March, 2005

US dollar versus euro:
A struggle for global domination


US domination in the world ultimately rests on two pillars — its overwhelming military superiority, especially on the seas; and its control of world economic flows through the role of the dollar as the world’s reserve currency. Increasingly it is clear that the Iraq war was more about preserving the second pillar — the dollar role — than the first, the military. In the dollar role, oil is a strategic factor.

The first Phase of Fixed Exchange Rate, 1945-1970: the United States had emerged from World War II clearly as the one sole superpower, with a strong industrial base and the largest gold reserves of any nation. The role of the dollar was directly tied to that of gold.

The gold Exchange Standard began to break down as Europe got on its feet economically and began to become a strong exporter by the mid-1960s. This growing economic strength in Western Europe coincided with soaring US public deficits as the Johnson administration escalated the tragic war in Vietnam.

During the 1960s, France, followed by other countries, began to demand gold from the US Federal Reserve. By May 1971 the drain of US Federal Reserve gold had become alarming, and even the Bank of England joined the Central Bank of France in demanding US gold for their dollars. The Nixon Administration opted to abandon gold entirely, going to a system of floating currencies in August 1971.

The sudden increase in oil prices by 400 per cent in 1973 by OPEC created enormous demand for the US dollar. Oil importing countries from Germany to Argentina to Japan, all faced with having to export in dollars to pay their expensive new oil import bills.

OPEC countries were flooded with new oil dollars. US and UK banks took the OPEC dollars and re-lent them as euro dollar bonds or loans, to countries of the third world desperate to borrow dollars to finance oil imports. Hundreds of billions of dollars were recycled between OPEC, London, and New York banks and back to third world borrowing countries.

The Third World debt crisis began when Paul Volcker and the US Federal Reserve unilaterally hiked US interest rates in late 1979 to try to save the failing dollar. After three years of record high US interest rates, the dollar was “saved”, but with the entire developing world suffocating economically under high US interest rates on their petrodollar loans.

To enforce debt repayment to the London and New York banks, the banks brought in the IMF to act as “debt policeman” of the world. Public spending for health, education and welfare was slashed on IMF orders to ensure the banks got timely debt service on their petrodollars.

The IMF “Washington Con­sensus” was developed to enforce draconian debt collection on third world countries, to force them to repay dollar debts, prevent any economic independence for the nations of the South, and keep the US banks and the dollar afloat. This phase during the Reagan years was based on ever-worsening economic decline in living standards across the world. IMF policies destroyed national economic growth and broke open markets for globalising multinationals seeking cheap production by outsourcing in the 1980s and especially into the 1990s.

Rise of Europe since 1990

The destruction of the Soviet Union and the emergence of a new single Europe and the European Monetary Union in the early 1990s began to present an entirely new challenge to the American hegemony.

Washington increasingly sees Euroland, especially the “Old Europe” of Germany and France, as the major strategic threat. A hidden war between the dollar and the new euro currency for global domination is at the heart of this new phase.

By their firm agreement with Saudi Arabia, as the largest OPEC oil producer, Washington guaranteed that oil, an essential commodity for every nation’s economy and the basis of all transport and much of the industrial economy, could only be purchased in world markets in dollars. In 1975, OPEC officially agreed to sell its oil only for dollars. A secret US military agreement to arm Saudi Arabia was the quid pro quo.

Until November 2000, no OPEC country dared to violate the dollar price rule. So long as the dollar was the strongest currency, there was little reason to violate their rule as well. Then French and other Euroland members finally convinced Saddam Hussein to defy the United States by selling Iraq’s oil for food not in dollars, only for euros. If it had continued, it would have created a panic sell-off of dollars by foreign central banks and OPEC oil producers.

In the months before the latest Iraq war, hints in this direction were heard from Russia, Iran, Indonesia, and even Venezuela. And Iranian OPEC official, Javad Yarjani, speaking in Spain in April 2002 at the invitation of the EU, delivered a detailed analysis of how OPEC at some future point might sell its oil to the EU for euros, not dollars. The invasion of Iraq was the easiest way to deliver a deadly pre-emptive warning to OPEC and others, not to flirt with abandoning the petro-dollar system in favour of one based on the euro.

So long as almost 70 per cent of world trade is done in dollars, the dollar is the currency, which central banks accumulate as reserves. Because oil is an essential commodity for every nation, the petrodollar system, which exists to the present, demands the build up of huge trade surpluses in order to accumulate dollar surpluses.

This is the case for every country but one— the United States, which controls the dollar and prints it at will. Because today the majority of all international trade is done in dollars, everyone aims to maximise dollar surpluses from their export trade.

US foreign debt

The US trade deficits, and net debt or liabilities to foreign accounts were well over 22 per cent of GDP in 2000, and have been climbing rapidly. In 1999, the year of the peak of the dot.com bubble fury, US net debt to foreigners was some 1.4 trillion dollars. By the end of 2003, it had exceeded an estimated 3.7 trillion dollars. Before 1989, the United States had been a net creditor, gaining more from its foreign investments than it paid to them as interest on Treasury bonds or other US assets. Since 1990, the United States has become a net foreign debtor nation to the tune of 3.7 trillion dollars.

With an annual current account (mainly trade) deficit of some 500 billion dollars which is some five per cent of GDP, the US must import or attract at least 1.4 billion dollars every day, to avoid a dollar collapse and keep its interest rates low enough to support the debt-­burdened corporate economy.

That net debt is getting worse at a dramatic pace. If France, Germany, Japan, Russia and a number of OPEC oil countries shifted even a small portion of their dollar reserves into euro to buy bonds from Germany or France for example, the United States would face a crisis which would destroy its economy.

The future of the US’s sole superpower status depends on pre-empting the threat emerging from Europe and Asia and Euroland especially. Thus, the hidden reasons for the decision to have a “regime change” in Iraq, was to pre-empt this threat. Iraq was a chess piece in this strategic game of supreme importance, one for the highest stakes.

Iraq invasion

This fight over petro-dollar versus petro-euros, which started in Iraq, is by no means over. The euro was created by French geopolitical strategists for establishing a multi-polar world after the collapse of the Soviet Union. The aim was to balance the overwhelming dominance of the US in world affairs. An alliance between Paris, Moscow, and Berlin running from the Atlantic to Asia could foreshadow a limit to US power.

This emerging threat from a French-led euro policy with Iraq and other countries, led some circles in the US policy establishment to begin thinking of pre-empting the threat to the petro-dollar system well before Bush became president.

In September 2000 Project for a New American Century (PNAC) released a major policy study: Rebuilding America’s Defenses: Strategies, Forces and Resources for a New Century.

This PNAC paper is the essential basis for the September 2002 presidential White Paper, The National Security Strategy of the United States of America. The PNAC’s paper supports a, “blueprint for maintaining global US pre-eminence, precluding the rise of a great power rival, and shaping the international security order in line with American principles and interests”. The “American Grand Strategy must be pursued as far as possible in the future.” Further, the US must “discourage advanced industrial nations from challenging our leadership or even aspiring to a larger regional or global role.”

The PNAC membership in 2000 included Dick Cheney: his wife Lynne Cheney, neo-conservative Cheney aide, Lewis Libby; Donald Rumsfeld; and Rumsfeld’s Deputy Secretary Paul Wolfowitz [Bush nomination to head World Bank].

It also included National Security Council Middle East head, Elliott Abrams; John Bolton of the State Department [US Ambassador to UN designate]; Richard Perle and William Kristol. As well, former Lockheed-Martin vice president, Bruce Jackson, and ex-CIA head James Woolsey were on board, along with Norman Podhoretz, another founder. Woolsey and Podhoretz speak openly about the “World War III”.

Most of these people are also members of a US group, the American Committee for Peace in Chechnya (ACPC), which supports the Chechen terrorists against Russia. It is becoming increasingly clear to many that the war in Iraq is about preserving American global dominance, but Iraq is not the end.

EXXON and BP (British Petroleum) have invested heavily in the former Soviet Republics of Azerbaijan, Turkmenistan, Uzbekistan, and Kazakhstan to eliminate Russian in influence on these countries. Both Kazakhstan and the Caspian Sea have some of the biggest oil fields of the world. Russian oil fields are in Tatarstan, a Muslim majority province and in Siberia.

Chechnya has some oil fields, but the importance of Chechnya rests in the fact that the major oil and gas pipelines from both Russian and Kazak oil fields pass through Chechnya.

Thus, if Chechnya were cut off from Russia, it would affect Russia’s ability to export oil and natural gas, in particular to the European market. Independence of Chechnya would pave the way for chain reactions in the other Muslim majority provinces in Russia, Tatarstan in particular.

Separation of both Chechnya and Tatarstan will reduce Russia’s crude oil deposits to a low level as the Siberian oil fields are located in the most inhospitable areas of the world. As a result, Russia would be reduced to a very poor country without any military significance. That is the reason for the Anglo- American support for the Chechen terrorism against Russia.

Thus, the invasion of Iraq was needed to ensure two objectives. The first is the occupation of the second largest oil fields in the Middle East, thus ensuring both future oil resources of the US and trade of oil in dollars.

The second objective is to scare away any other countries from even thinking about de-linking the US dollar from oil trading. De-­linking oil trading from the dollar will diminish the special status of the dollar and the ability of the US economy to buy goods and services virtually free from the rest of the world and for it to force countries with a trade surplus with the US to lend money to the US. That would certainly destroy the economy of the US which is built on borrowed money.

Because Iraq was the first oil producing country to convert its foreign exchange reserves from the dollar to the euro, it became the first country to come under US attack. Venezuela has already had a US-backed coup.

Taken from an article by Dipak Basu,
first published in People’s Democracy, paper of Communist Party of India.


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